The American Institute of CPAs has issued an exposure draft proposing changes in its standards for performing and reporting on peer reviews and engagement reviews of CPA firms.

The proposals would change the impact to an engagement review report when more than one engagement has been submitted for review, the same exact deficiency occurs on each of the engagements submitted for review, and there are no other deficiencies. Currently, firms would receive a pass with deficiencies in this scenario. The proposed changes would instead result in a fail report.

The Peer Review Standards had been changed at the beginning of 2009 to provide more transparency on the conclusions conveyed by the peer reviewer and make the report easier to understand. The AICPA noted that the Peer Review Board originally proposed guidance for engagement reviews that indicated when the same exact deficiency occurs on all engagements submitted for review, it would result in a peer review rating of fail. This guidance applied whether the firm performed one or multiple engagements.

“Feedback received at that time indicated the peer review community did not believe the guidance was fair to a firm that performs multiple engagements,” said the exposure draft. “In response to the feedback received, the board created an exception whereby when more than one engagement has been submitted for review, and the exact same deficiency occurs on each of the engagements, and there are no other deficiencies, a report with a peer review rating of pass with deficiency should be issued rather than with a peer review rating of fail. The board acknowledged the exception did result in inconsistent report ratings for engagement reviews but believed the exception to be the best guidance at the time.”

However, the Peer Review Board considered the concerns raised by firms about the inconsistencies that had been created by the guidance and concluded that the exception would not be apparent in the report or likely to be meaningful to readers of the report even if it were disclosed. To address the inconsistencies and improve the transparency of the peer review reports, the board is proposing that the exception be removed and that the same deficiency on multiple engagements, with no other deficiencies, would result in a fail report.

The AICPA is asking for comments on the exposure draft by July 5.